Real R&D options

David P. Newton, Dean A. Paxson, Martin Widdicks

Research output: Contribution to journalReview articlepeer-review

Abstract

Real options have been growing in popularity in recent years, and this has been accompanied by improvements in their modelling and valuation. Real options enable companies or managers to value projects more accurately by incorporating managerial flexibilities into the valuation model. This is in contrast to traditional discounted cash flow valuation, where projects are assumed to proceed as planned, regardless of future events. One area where real option techniques have been used extensively is in R&D. This paper gives a review of the research on real R&D options, starting with the fundamentals, then detailing more innovative and up-to-date models as well as discussing the difficulties of applying these models, particularly with reference to parameter estimation. It also attempts to provide a 'best practice' for practitioners wishing to value R&D projects using real options.

Original languageEnglish (US)
Pages (from-to)113-130
Number of pages18
JournalInternational Journal of Management Reviews
Volume5-6
Issue number2
DOIs
StatePublished - Jun 1 2004
Externally publishedYes

ASJC Scopus subject areas

  • Decision Sciences(all)
  • Strategy and Management
  • Management of Technology and Innovation

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